Look for Small Profits To Return in April

Pork producers should take a cautious approach to the future, even though profitability may be just around the corner

Mar 02, 2009

Pork producers should take a cautious approach to the future, even though profitability may be just around the corner, says a Purdue University Extension marketing specialist.

“The extreme uncertainty of the moment implies that pork producers, like all of agriculture, should be conservative and defensive,” says Chris Hurt. “Perhaps management decisions in 2009 should be focused on increasing odds of survival, rather than looking for big opportunities.”

The Purdue agricultural economist suggested that producers may be on the verge of returning to profitability after incurring losses since October 2007.

“Hog prices are expected to rise seasonally in coming months and costs for feed continue to drop under the concerns of slowing world economic activity,” he says. “For the year, hog producers are expected to see an average live price of about $47.50/cwt., but costs of production as expected to drop to near $45.50, providing a modest profit.”

The global economy is producing negative effects on pork demand, but that is also helping to lower feed costs as corn and soybean meal prices drop.

In contrast, yearly average hog prices have varied little – ranging between $47-48/cwt. live in 2006-2008 – and that trend is continuing in 2009.

“Wild fluctuations in costs of production are the primary reason for an estimated profit of $27/head in 2006 and an estimated loss of $17/head in 2008,” he points out. “Changing prices of corn and soybean meal have been the drivers of returns.”

Hog prices won’t benefit as much this year from export demand as the Agriculture Department is now predicting a 14% drop.

“Even though domestic pork production will drop 1-2% in 2009, fewer exports mean that pork supplies available to U.S. consumers will rise modestly for the year, but with some differences by quarter,” Hurt suggests.

Pork supplies per person will rise slightly in the first quarter and by 6% in the second.

“The large increase in domestic supplies in the second quarter is because of large exports to China in the same quarter a year ago,” he says. “More modest Chinese purchases in the second quarter of 2009 will leave considerably larger amounts for U.S. consumers. Availability will be about unchanged in the third quarter and down 4% in the final quarter of the year.”

Live hog prices are projected to average $42.50/cwt. for 51-52% lean carcasses in the first quarter of 2009, $50 in the second quarter, $51 in the third quarter and $46 in the fourth quarter of the year.

Declining corn and soybean meal prices will soften the impact on cost of production in 2009.

For a farrow-to-finish operation, estimated costs increased from about $37/cwt. live in 2006 to a record high of $54 in 2008. The previous record high estimated annual cost was $48 in 1996.

“The current estimated 2009 corn price of $3.36 is down from $4.78 last year. High protein meal price this year of $261/ton would be down $70/ton from 2008. Estimated 2009 prices for corn and soybean meal are based on the actual prices for the first two months and adjusted futures prices as of March 2, 2009,” Hurt estimates.

These hog price and cost estimates suggest pork producers would return to profitability in April. Estimated losses of $11/head in the first quarter would be replaced by profits in the second through fourth quarters of $12, $15 and $6, respectively.

“Like all sectors of agriculture, pork producers face large uncertainties from the general economic conditions,” he comments. This means that reductions in the breeding herd will likely continue throughout the year.

“Smaller pork supplies into 2010 would seem to put a brighter face on profit prospects, but further loss of pork demand in a weakening economy could offset those gains.”